A Baby Boomer looks at health, finance, retirement, grown-up children and ... how time flies.

Friday, November 30, 2012

What, Me Worry About the Fiscal Cliff?

A few weeks ago I wrote a piece about the fiscal cliff for the U. S. News retirement site. I saw that the so-called "fiscalcliff"wasonthehorizon and thought people should know about it. But in all honesty, I figured that the fiscal cliff was kind of a manufactured crisis and that it would go the way of Y-2K after the election was decided and politicians in Washington came to their senses.

Now I'm not so sure. Perhaps I'm giving people in Washington too much credit.

Theterm
"fiscal cliff" isshorthandforaseriesoffederalspendingcutsandtaxhikesthatwillautomaticallygointoeffectinJanuary,ifCongressand the President don't get together and act to overridethem.The measuresoriginatedinCongresslastyearaspartofacompromisetopasstheBudgetControlActof2011.

Thefiscalcliffpresentsagiantairpocketfortheentireeconomy.But
therearea few ways in which it would affect us seniors in particular.

For example, if you rely on stock or mutual fund dividends to help fund your retirement, you can expect to take a "pay cut," as those dividends, currently taxedatmaximumrateof15%, will betaxedatordinaryincomerates,upto
about 40%.

Do you have any capital gains on investments you might have made five or ten or twenty years ago? Again, the tax rate would go up on them. The maximumtaxrateonlong-termcapitalgains(investmentsheldlongerthanayear)willincreasefrom15%to20%. Meaning, again, if you plan to cash in some investments to help fund your retirement, you will be forced to take a pay cut.

And if you do own any investments, either in your IRA or elsewhere, the value of those assets will likely go down. Intheory,thevalueofaninvestmentconsistsoftheafter-taxsumofallfuturereturns.Ifasmostexpertspredict,theeconomysuffersaftergoingoverthefiscalcliff,thenthosereturnswillbelower.
And toaddinsulttoinjury,thoselowerreturnswillbetaxedatahigherrate.

And then there's your home. Nooneknowshowthefiscalcliffwillinfluencemortgagerates.Butwithlessgovernmentspending,lessemployment,lessafter-taxincome,andalessrobusteconomyingeneral,it'shardtoseehomepricesreboundinginanymeaningfulway.Infact,thefiscalcliffcouldrachetdownvalueofyourhouseyetagain,asfundsaresqueezedoutofthehousingmarkettoshoreuptherestoftheeconomy.

And if all this isn't enough, there are the cutbacks. The government spends a lot of money, and if it spends less, then there will be across-the-board cutbacks to government programs, bringing hardships to beneficiaries as well as lower revenues to the thousands of companies that do business with the government.

More particularly, the fiscal cliff aims to cutsome$11billionoutofMedicare,inpartbyloweringpaymentstodoctors.Thiscouldmeanindividualpatientswillhavetopaythedifference.Alternatively,itcouldputcostpressuresonmedicalfacilities,forcingthemtoreducestaff.LowerpaymentscouldalsoleaddoctorstolimitthenumberofMedicarepatientstheywillsee.Thefiscalcliffcouldmakeitharderforsomepeopletofindadoctor,andcouldmeanlongerwaittimesandlowerqualityofserviceforthosewhodo.

There is arguably one benefit to the fiscal cliff. Social Security. No,yourbenefitwillnotgetanyhigher.Butthefiscalcliff automatically ends the 2%payrolltax"holiday"
enacted under PresidentObamain2010.SincethepayrolltaxfundsSocialSecurity,restoring thehighertaxrate willrepairsomeofthedamagedonetothefundingoftheprogram.

But is that worth all the other pain and suffering that will be brought to you by the fiscal cliff? I doubt it.

To be sure, there's no reason why Congress couldn't do both: Reinstate the payroll tax to shore up Social Security and then also make some kind of deal to avoid all those other economic problems. But that would require them to grow up and act like adults. What are the chances of that?

P. S. To see what's currently going on in Congress, to witness all that your representatives are doing on your behalf, to view all the frenetic activity going on in Washington to save the situation, check out the Capitol webcam.

I think Congress and the White House are both posturing right now. I think we WILL go over the cliff and that's not necessarily a bad thing. The Republicans are never going to play ball here and allow taxes to go up on the uber wealthy, they just won't. So over the cliff we go and the unpaid Bush tax cuts are gone. Then Congress can lower taxes on the lower 98 percent and if the Republicans refuse they'll again be decimated in 2014.

What happened to all the money? I looked into a "high-yeild" savings account at my credit union. A whole .3% until the account reaches 25,000, when it goes to .4%And then I saw a commercial for a bank that was so sorry for not being able to give customers a return on their money that they were donating 5% of their profits to community programs this holiday season. Hello??

The part of all this that is overlooked is the irony of Congress and the president trying to undo something they agreed to just last year.

The whole point was a series of steps that no one wanted to have occur, so our brightest minds would figure out a compromise.

Now that Washington is faced with exactly what they designed to never occur everyone seems desperate to rewrite the "rules."

Personally I am sick and tired of never being able to make concrete investment and spending plans because everything is either a last minute patch or a "kick the can down the road" approach. Can't these bozos act like adults, agree on solutions and stick to their decisions?

I have a question...is there anything at all we can do about this? It is a bit like telling a 5 year old that their plane might crash in the ocean. They will worry but not be able to do anything about it.

If there is something we can do, let me know. Does out social media help? Can we tweet the legislature and tell them how worried we are? Will it do any good?

I've been writing my congressman.Fix the TAX CODE!!!!! Now is the time since people are ready for just about anything.I am ready for the cliff...not in a negative way. My understanding is that dividends and capital gains tax will go up ---but only on the people making more than $100,000 off of them. Sounds fair.I also can see some of the cuts in Medicare...there are some major abuses out there for people who know the loops in the system (think power chairs). I find it amazing that a place that the average senior has a million in the bank has plenty of Medicare paid for power chairs--and yet the place I volunteer at has none!AS for the military- start with the contractors!!!!! Get rid of most of them. Those are the Rumsfield cronies who are being made rich off of our troops!I'm ready for the fall. It will be worth a spurt of unknown IF it really gets fixed (doubtful--- but there is always hope.)

I feel the frustration, but I think going over the cliff will be cutting off our nose to spite our face. And while I agree there isn't a whole lot we can do, it certainly can't hurt to talk about it and, yes, write your congressperson.

Raising taxes only on dividends and capital gains of over $100,000 sounds fair and reasonable to me, to tax the rich but protect retirees -- but unfortunately for us, the fiscal cliff affects everyone. The $100K limit would be a compromise that would have to be made.

We met with our financial planner today. One of the topics was the fiscal cliff. She said it might not be much of an effect, but it could be more serious. Wanted to make sure we have enough liquidity for a couple of years without having to tap investments (we're lucky to have pensions). She expects the market to come roaring back once the current foolishness passes.

About Me

I’m a Baby Boomer, part of the pig-in-a-python demographic group that has brought so many changes to America – and will continue to do so until we cash our last Social Security check. I had a typical baby boomer career. I attended college, went to business school, worked for several companies, then in my mid-50s was laid off. Meanwhile, I got divorced, and my two kids left for college. Now I live with my significant other, B, who has two children of her own. We live in the New York area, a convenient stopover for our four peripatetic 20-somethings. And I produce this blog Sightings Over Sixty which covers health, finance, retirement – concerns of people who realize that somehow they have grown up.